Comparing Unemployment During the Great Depression and the Great Recession

Barry Eichengreen’s and Tim Hatton’s January 1988 paper entitled “Interwar Unemployment in International Perspective” is a useful starting point for any effort to compare unemployment during the Great Depression and the Great Recession.

It is useful to begin by recognizing three related cautions that the authors make in that paper. First, the modern sense of the term “unemployment” (willing and able to work, but unable to find a job commensurate with the worker’s skills) was not common until the decades before the Great Depression. The prior assumption was that people were unemployed because they were lazy. There was little understanding of business cycles or inadequate demand, little sympathy for the unemployed, and no sense that business or government were primarily responsible for the the level of unemployment. This meant that keeping data on unemployment was rarely a concern of government. Data on unemployment in Europe was largely collected through industrial trade unions.

Second, this means that the data on unemployment during the Great Depression are, globally, exceptionally poor and comparability even among nations during the same time period is even poorer. Our ability to compare unemployment data today with unemployment data during the Great Depression is even more subject to error.

Third, the data on unemployment during the Great Depression are often highly biased because of the manner in which they were gathered and the nature of the Great Depression. In Europe and the U.S. the Great Depression was overwhelmingly an industrial depression and industry trade unions were far more likely to gather data on unemployment in the industrial sector. This means that the typical data one sees on unemployment rates during the Great Depression for the U.S. and Europe likely overstate substantially the actual economy-wide rates of unemployment. The authors cite findings by researchers suggesting overstatements in the overall unemployment rate during the Great Depression for many nations were greater than 50%. (In plainer English – the true unemployment rate appears to have been less than half the typically reported unemployment rate in many nations during the Great Depression.)

U.S. unemployment data during the Great Depression are substantially inflated because people employed in public works programs doing highly productive work were counted as “unemployed” in that era. This still means that the Great Depression was often catastrophic, but it also means that the far more accurate (but still far from perfect) unemployment data for the Great Recession show that the two crises are broadly similar in severity in the Eurozone when severity is measured by the unemployment rate. For much of the Eurozone, the current crisis would be more accurately referred to as “The Second Great Depression.”

I use the term “broadly similar” because of the cautions I emphasized in my second point. We cannot ascribe the same accuracy to the data from the Great Depression, even after we adjust those data for known biases, that we can to the data on unemployment during the Great Recession. That is a significant caution because the data on unemployment during the Great Recession are still subject to material error.

With those cautions firmly in mind, here are the reasons why the data show that unemployment in the Eurozone is broadly similar to the unemployment during the Great Recession. The adjusted data, for example, report an average unemployment rate for 1930-1938 of 8.8% for Germany and 9.8% for the U.K. (Eichengreen & Hatton 1988: Table 1.2, p. 9). The authors did not find a reliable adjusted figure for France, but the unadjusted figure for the average French unemployment rate in 1930-1938 was 10.2%. Unfortunately, even modestly reliable unemployment data for the European periphery during the Great Depression are not available.

“The euro zone jobless rate rose to 12.0 percent in the first two months of the year, the latest in a series of record highs tracing to late 2011, Eurostat, the statistical agency of the European Union, reported [April 2, 2013].

The agency revised upward the January jobless rate for the euro zone from the previously reported 11.9 percent, itself a record. For the overall European Union, Eurostat said the February jobless rate rose to 10.9 percent from 10.8 percent in January, with more than 26 million people without work across the 27-nation bloc.

Both the jobless rates and the number of unemployed are the highest Eurostat has recorded in data that reach back to 1995, before the creation of the euro.”

Eurozone unemployment, overall, is materially higher than the best estimates of European unemployment during the Great Depression. The length of the two crises in Europe is becoming ever more similar as the Eurozone economic crisis deepens and grows longer due to the counterproductive austerity policies and to the inherently poor design of the euro as a non-sovereign currency.

Austerity has inflicted an über-Depression on the Peoples of the Eurozone’s Periphery

While we cannot compare reliably unemployment rates during the Great Depression and the EU’s über-Depression in the nations of the EU’s periphery, we can use the same New York Times article to compare current unemployment rates in periphery with unemployment rates in France, Germany, and the UK during the Great Depression and we can compare unemployment rates in those the EU’s three leading economies directly.

“The European labor market has now declined for 22 straight months, making this the worst downturn since the early 1990s, Jennifer McKeown, an economist in London with Capital Economics, wrote in a research note Tuesday. ‘With fiscal tightening still putting downward pressure on disposable incomes and consumer confidence at very low levels, household spending is likely to fall further in the coming months,’ Ms. McKeown said.

Ms. McKeown also noted that the France’s February jobless rate at 10.8 percent — double the German rate of 5.4 percent — ‘looks very worrying.’”

German unemployment rates are materially lower now than during the Great Depression, but France’s rate is higher than the unadjusted (and therefore inflated through collection bias) average unemployment France suffered during the Great Depression.

“Britain, the largest E.U. economy outside the single currency bloc, had an unemployment rate of 7.7 percent in December, the latest available month.”

The current UK unemployment rate remains below the average rate during the Great Depression, but it is vital to remember that the UK did not adopt the euro and retains a sovereign currency. It has failed to use that key strength to end large, growing unemployment because of its embrace of the self-inflicted wound of austerity.

The eurozone’s periphery is the epicenter of the über-Depression. It is an utterly gratuitous depression, the worst Eigentor in modern economic history, inflicted by austerity.

“The jobless crisis is hitting hardest in the south of Europe. Eurostat said Greece, with its economy in free fall, had the euro zone’s highest unemployment rate ,at 26.4 percent in December, the latest month for which data are available. Among Greek youth, the jobless rate has hit a staggering level, 58.4 percent.

Spain, where the economy has contracted sharply after the collapse of the global credit bubble, posted the second-highest unemployment rate in the euro zone in February, at 26.3 percent.”

Spain’s rate for youth unemployment (which includes young adults) is also over 50% and Italy’s rate for youth unemployment is over 36%. The Great Depression generally created a “U”-shaped curve for the incidence of unemployment for workers based on age (the young and the old were most likely to be unemployed) (Eichengreen & Hatton 1988: Table 1.9, p. 31). The levels of youth unemployment in European core nations during the Great Depression was far smaller that youth unemployment in Greece, Italy, and Spain during the ongoing über-Depression. Indeed, the current reported rates of youth unemployment in each of these Nations, plus Ireland and Portugal is reduced substantially by the emigration of young workers. The sick old joke in Ireland is once again true: “What’s Ireland’s leading export?” Answer: “the Irish.” When students get their university degrees in the periphery they often emigrate to seek employment.

Conclusion

When a Nation gives up its sovereign currency it puts its sovereignty at risk. It becomes subject to the attacks of the bond vigilantes and can be forced into situations in which it can offer its young people so little opportunity that it forces many of its best and brightest to flee the Nation.

Austerity poses a clear and present nature to the Eurozone and the global economy. In the core nations of the Eurozone it has caused Great Depression-levels of unemployment – and unemployment is increasing seven years after the global bubbles began to crack in 2006. The periphery, however, is not suffering the levels of unemployment that the European core nations suffered during the Great Depression. The ongoing über-Depression has inflicted dramatically greater levels of unemployment – up to four times greater – than scholars believe Europe’s largest economy’s suffered, on average, from 1930-1938. I end by repeating the caution that the data during the Great Depression are sufficiently imprecise to be cautious in claiming an exact ratio. What we can say is that, measured by unemployment, the so-called Great Recession is sometimes more severe for core nations than was the Great Depression and it is dramatically more severe for the periphery than it was for the core nations during the Great Depression.

William K. Black, J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City.

Professor Black was the Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board, General Counsel of the Federal Home Loan Bank of San Francisco, and Senior Deputy Chief Counsel of the Office of Thrift Supervision.

His expertise is in: banking law, fraud detection and prevention, and the regulation and supervision of financial institutions.

Professor Black earned a PhD at University of California at Irvine and a J.D. at University of Michigan Law School.